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Don't Let a Market Crash Destroy Your Retirement Dreams

Panic is never the right answer. Take a considered approach to your long-term retirement finances.

The past week has left millions of Americans scared about their financial future, as stock market volatility has reared its head, with triple-digit moves in the Dow Jones Industrials (DJINDICES:^DJI) becoming an everyday event. As stocks have fallen sharply, you'll find all sorts of experts claiming to have the analysis that you need to weather the short-term bumps in the market. Yet while those so-called experts make their guesses about how far the Dow could fall, most of them have a gaping hole in their analysis that makes ordinary retirees and near-retirees ask one question: what does a potential market crash really mean for me?

The answer is simpler than you might think. If you're in or nearing retirement, then you need to ensure that you're properly insulated from too much market volatility, especially if you're counting on taking money out of your investment portfolio on a regular basis to cover income needs. As all too many people discovered in 2008, big drops in your portfolio can crush your plans for a happy retirement lifestyle.

But that doesn't mean you should panic now. All it requires is the sort of periodic reality check that smart investors make regularly no matter what the market's doing. By setting up some mental warning signs -- much like the way your car will warn you about potential problems -- you can make sure you're on top of the risks involved in your investments and stay in the driver's seat to keep your retirement planning on course rather than being a helpless bystander as your dreams go up in smoke.

Things changeIf you want to succeed in investing, you need to have a plan. But good plans have to be flexible to adapt to changing conditions.

A good retirement plan is like a roadmap to guide you on a long trip. The map lets you choose the path you'd like to follow, and for long stretches of open road, you can put yourself on cruise control and keep making progress toward your destination. But you have to rely on the accuracy of the map. If it leaves out a road closure, you'll have to change course to find a detour that will get you where you want to go. Moreover, if heavy traffic or bad weather make your preferred route suddenly look less attractive, diverting to a better route is the smart thing to do before you get stuck in a situation you'd much rather avoid.

Your plan is your investment roadmap, and it has to accommodate all sorts of changes, both in your personal life and in events happening throughout the world. Smart investors see these changes and make appropriate updates to their course on their investment roadmap.

3 times to do regular maintenance on your investmentsThe challenge for many people, though, is how to know when to make changes to their retirement planning. Smart retirees have learned through experience that doing maintenance checks on their planning makes sense in three different situations:

Doing periodic maintenance. Just like changing the oil in your car every few months, checking up on your investments at regular intervals will help keep your retirement planning running smooth. You don't want to obsess over moves on a daily or weekly basis, but a once-a-year look will keep you focused on long-term goals. Consider: even with last week's plunge, the Dow is still up almost 9% over the past year.

Addressing goal changes. Everyone faces new challenges in their lives, and they can have a big impact on your finances. For those nearing retirement, an unexpected layoff can throw your finances into turmoil unless you've made contingency plans for how to cope. Similarly, needing to help put your grandkids through school or dealing with a chronic illness can require some changes to your investments to make sure you have the money you need.

Dealing with big market moves. From time to time, you'll see your portfolio thrown out of balance as your stocks, bonds, cash, and other assets move in different directions. Doing a special rebalancing at those times can help keep your risk levels stable while potentially taking advantage when future conditions improve.

The road to a happy and financially secure retirement isn't always easy to follow. But keeping your eyes on the road ahead and making sure you're still on course will make your ride toward retirement as smooth as possible.

Author

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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